The Importance of Consumer Protection

President Obama with Elizabeth Warren, Prospective Head of the New Consumer Financial Protection Bureau

To many of us, developing greater consumer protection measures is common sense: every day, we see families foreclosed out of their homes or evicted from their rental units because they did not (or in fact could not) understand the financial product they purchased. On the lending side, which we see much more commonly at St. Ambrose, these products often come in the form of adjustable-rate-mortgages. In such a loan, the initial interest rate often starts low but rapidly increases over time, leading the mortgage holder to believe that they are getting a deal at first only to find out later that they will be unable to make payments and may end up in foreclosure.

We’ve come across situations in which homeowners were not told that the interest rates would rise over time or where banks have misrepresented the product entirely, suggesting that the interest rate is fixed. The latter scenario happens frequently when banks market products to buyers whose first language is not English. Sometimes, we even see direct credit lenders selling products to low-income, under-resourced clients in order to “help” them purchase a home. Often times, hidden fees are imbedded in the loan product, whereby the buyer is penalized substantially for late payments.

These stories are common among housing counselors. Beyond the housing world, other industries have long played the same game. Credit cards, for instance, often fail to clearly disclose the interest rate for buyers intending to pay a lower-end monthly installment. Rent-to-Own schemes are another classis example. Companies that engage in International Money Transfers—or companies that help Americans transfer money to family members and friends over seas (a multi-billion dollar industry)—often fail to disclose remittance fees, or transaction fees they charge customers. Likewise, these companies frequently do not notify their customers of the exchange rates on transfers, which, for obvious reasons, can be crucial to the amount of money a customer is willing to send and the commensurate fee they will owe.

These situations are the reason for the creation of the new Consumer Financial Protection Bureau, for which the White House has selected Professor Elizabeth Warren to head. As the CFPB’s excellent website explains, before the financial crisis, the federal government could not adequately monitor the market for unfair (and perhaps illegal) practices because too many different agencies existed with varying roles; inevitably, cracks emerged, and sleazy companies slipped through them. The CFPB intends to rectify this problem by functioning as a centralized agency that monitors predatory scams across industries.

Beyond its importance to consumers, the Bureau is crucial on a systemic level. Perhaps the main cause of the financial crisis was the proliferation of securitized loan products, (many of which were backed mainly by home mortgages). Investors (and the Wall Street banks that facilitated their purchases) demanded these products highly, incentivizing main street banks to continue to hand out credit, even when buyers were less-than-credit-worthy. Eventually, this chain, coupled with the lack of government oversight, poor public policy, and failed public-private partnerships, collapsed, leading to the recession.

The CFPB would ensure that products like poor loans do not pervade the market like they once did, which would lead to significant economic consequences. Moreover, Ms. Warren, a Harvard law professor with an unimpeachable record of standing up for Average Joes, is the woman for the job.

However, Congress must confirm her first, and backed by special interests, the confirmation may not materialize. (For the latest example of crude opposition, see here). Whatever happens, we know that kick starting the CFPB, a project that his been on the drawing board for years now, would make the job of St. Ambrose and similar non-profits around the country much, much easier.